By
any standard, China’s economic performance over the last three decades has been
impressive. GDP growth averaged 10 percent a year, and over 500 million people
were lifted out of poverty.
China is now the world’s largest exporter and manufacturer, and its second
largest economy.

Even if
growth moderates, China is likely to become a high-income economy and the
world’s largest economy before 2030,
notwithstanding the fact that its per capita income would still be a fraction of
the average in advanced economies.

But two
questions arise. Can China’s growth rate still be among the highest in the world
even if it slows from its current pace? And can it maintain this rapid growth
with little disruption to the world, the environment, and the fabric of its own
society?

This
report answers both questions in the affirmative, without downplaying the risks.
By 2030, China has the potential to be a modern, harmonious, and creative
high-income society. But achieving this objective will not be easy. To seize
its opportunities, meet its many challenges, and realize its development vision
for 2030, China needs to implement a new development strategy in its next phase
of development. The reforms that launched China on its current growth trajectory
were inspired by Deng Xiaoping, who played an important role in building
consensus for a fundamental shift in
the country’s strategy. After more than 30 years of rapid growth, China has
reached another turning point in its development path when a second strategic,
and no less fundamental, shift is called for.

The 12th
Five Year Plan provides an excellent start. This report combines its key
elements to design a longer-term strategy that extends to 2030. More important,
it focuses on the “how,” not just the “what.” Six important messages emerge
from the analysis:

First, implement
structural reforms to strengthen the foundations for a market based economy
by
redefining the role of government; reforming and restructuring state enterprises
and banks; developing the private sector; promoting competition; and deepening
reforms in the land, labor, and financial markets. As an economy approaches the
technology frontier and exhausts the potential for acquiring and applying
technology from abroad, the role of the government and its relationship to
markets and the private sector needs to change fundamentally. While providing
relatively fewer “tangible” public goods and services directly, the government
will need to provide more intangible public goods and services like systems,
rules, and policies, which increase production efficiency, promote competition,
facilitate specialization, enhance the efficiency of resource allocation,
protect the environment, and reduce risks and uncertainties.

In the enterprise
sector, the focus will need to be further reforms of state enterprises
(including measures to recalibrate the role of public resources, introduce
modern corporate governance practices, such as separating ownership from
management, and implement gradual ownership diversification where necessary),
private sector development and fewer barriers to entry and exit, and increased
competition in all sectors, including in strategic and pillar industries. In the
financial sector, it would require commercializing the banking system, gradually
allowing interest rates to be set by market forces, deepening the capital
market, and developing the legal and supervisory infrastructure to ensure
financial stability and build the credible foundations for the
internationalization of China’s financial sector.

In the labor market,
China needs to accelerate phased reforms of the hukou system to ensure that
by 2030, Chinese workers can move in response to market signals. It also needs
to introduce measures to increase labor force participation rates, rethink wage
policy, and use social security instruments (pensions, health, and unemployment
insurance) that are portable nationwide. Finally, rural land markets need to be
overhauled to protect farmer rights and increase efficiency of land use, and
policies for acquisition of rural land for urban use must be thoroughly
overhauled to prevent urban sprawl, reduce local government dependency on
land-related revenues, and address a frequent cause of complaint from farmers.

Second,
accelerate the pace of innovation and create an open innovation system in which
competitive pressures encourage Chinese firms to engage in product and process
innovation not only through their own research and development but also by
participating in global research and development networks. China has already
introduced a range of initiatives in establishing a research and development
infrastructure and is far ahead of most other developing countries. Its priority
going forward is to increase the quality of research and development, rather
than just quantity. To achieve this, policy makers will need to focus on
increasing the technical and cognitive skills of university graduates and
building a few world-class research universities with strong links to industry;
fostering “innovative cities” that bring together high-quality talent, knowledge
networks, dynamic firms, and learning institutions, and allow them to interact
without restriction; and increasing the availability of patient risk capital for
private startup firms.

Third, seize the
opportunity to “go green” through a mix of
market incentives, regulations, public investments, industrial policy, and
institutional development. Encouraging green development and increased
efficiency of resource use is expected to not only improve the level of
well-being and sustain rapid growth, but also address China’s manifold
environmental challenges. The intention is to encourage new investments in a
range of low-pollution, energy- and resource-efficient industries that would
lead to greener development, spur investments in related upstream and downstream
manufacturing and services, and build international competitive advantage in a
global sunrise industry. These policies have the potential to succeed, given
China many advantages—its large market size that will allow rapid scaling up of
successful technologies to achieve economies of scale and reduced unit costs; a
high investment rate that will permit rapid replacement of old, inefficient, and
environmentally damaging capital stock; its growing and dynamic private sector
that will respond to new signals from government, provided it gets access to
adequate levels of finance; and a relatively well-developed research and
development infrastructure that can be harnessed to reach and then expand the
“green” technology frontier.

Fourth, expand
opportunities and promote social security for all by facilitating equal
access to jobs, finance, quality social services, and portable social security.
These policies will be critical in reversing rising inequality, helping
households manage employment-,health-, and age-related risks, and increasing
labor mobility. China’s relatively high social and economic inequality (some
dimensions of which have been increasing) stems in large part from large
rural-urban differences in access to jobs, key public services, and social
protection. Reversing this trend requires three coordinated actions:
delivering more and better quality public services to underserved rural areas
and migrant populations from early childhood to tertiary education institutions
and from primary health care to care for the aged; restructuring social security
systems to ensure secure social safety nets; and mobilizing all segments of
society—public and private, government and social organizations—to share
responsibilities in financing, delivering, and monitoring the delivery of social
services.

Fifth, strengthen
the fiscal system by mobilizing
additional revenues and ensuring local governments have adequate financing to
meet heavy and rising expenditure responsibilities. Many of the reforms
proposed in this development strategy—enterprise and financial sector reforms,
green development, equality of opportunity for all—have implications for the
level and allocation of public expenditures. Over the next two decades, the
agenda for strengthening the fiscal system will involve three key dimensions:
mobilizing additional fiscal resources to meet rising budgetary demands;
reallocating spending toward social and environmental objectives; and ensuring
that budgetary resources available at different levels of government (central,
provincial, prefectural, county, township, village) are commensurate with
expenditure responsibilities. Without appropriate fiscal reforms, many of the
other reform elements of the new development strategy would be difficult to move
forward.

Sixth, seek
mutually beneficial relations with the world by becoming a
proactive stakeholder in the global economy, actively using multilateral
institutions and frameworks, and shaping the global governance agenda.

China’s integration
with the global economy served it well over the past three decades. By
continuing to intensify its trade, investment, and financial links with the
global economy over the next two decades, China will be able to benefit from
further specialization, increased investment opportunities and higher returns to
capital, and a mutually beneficial flow of ideas and knowledge. As a key
stakeholder in the global economy, China must remain proactive in resuscitating
the stalled Doha multilateral trade negotiations, advocate “open regionalism” as
a feature of regional trading arrangements, and support a multilateral agreement
on investment flows. Integrating the Chinese financial sector with the global
financial system, which will involve opening the capital account (among other
things), will need to be undertaken steadily and with considerable care, but it
will be a key step toward internationalizing the renminbi as a global reserve
currency. Finally, China must play a central role in engaging with its partners
in multilateral settings to shape the global governance agenda and address
pressing global economic issues such as climate change, global financial
stability, and a more effective international aid architecture that serves the
cause of development in poor nations less fortunate than China.

* * *

These six priority
reform areas lay out objectives for the short, medium, and long term, and policy
makers need to sequence the reforms within and across these areas appropriately
to ensure smooth implementation and to reach desired outcomes. A successful
outcome will require strong leadership and commitment, steady implementation
with a determined will, coordination across ministries and agencies, and
sensitive yet effective management of a consultation process that will ensure
public support and participation in the design, implementation, and oversight of
the reform process. And since the global economy is entering a dangerous
phase and China itself will be transitioning from middle-income to
high-income status, the government will need to respond to a variety of
risks, shocks, and vulnerabilities as they arise; in doing so, it must hold fast
to the principle that policy responses to short-term problems should uphold, not
undermine the long-term reform priorities.